I. ADVANCE FOR MATERIAL WRITTEN OFF IS A TRADING LOSS, NOT CAPITAL LOSS

SUITABLE TITLE

Unrecovered Advance for Goods is Allowable Business Loss Even if Project Revenue is Deferred

ISSUE

Whether an advance of Rs. 1.50 Crore paid for the supply of ready-mix concrete (RMC) which became irrecoverable is to be treated as a Revenue Loss (Trading Loss) allowable under Section 28(i)/37, or a Capital Loss as contended by the AO, particularly when the revenue from the specific project had not yet been recognized in the books.

FACTS

Assessee: Engaged in developing commercial and residential properties.
Transaction: Paid Rs. 1.50 Crore as an advance to a supplier for RMC material.
The Loss: The supplier failed to deliver the material and did not refund the money. The assessee wrote off the amount as a revenue loss.
AO’s Stand: The AO treated it as a Capital Loss and disallowed it, arguing that since the assessee follows the Project Completion Method and no revenue from this project was recognized during the year, the expense/loss could not be claimed.

DECISION

Nature of Loss: The Tribunal held that the advance was given in the ordinary course of business for procuring raw material (stock-in-trade).
Timing Irrelevant: A trading loss incurred due to the forfeiture or non-recovery of trade advances is deductible in the year it is written off. The fact that the corresponding project revenue is recognized in subsequent years does not convert a revenue loss into a capital one.
Verdict: The write-off was allowed as a business loss. [In Favour of Assessee]

II. INTEREST ON REFUND OF BOOKING ADVANCE IS ALLOWABLE EXPENDITURE

SUITABLE TITLE

Interest Paid to Customers on Refund of Booking Amount for Non-Delivery of Flats is Business Expenditure

ISSUE

Whether interest paid to property buyers upon the refund of their booking advances (due to the developer’s failure to deliver flats) is an allowable business expenditure under Section 37(1).

FACTS

The assessee received booking advances for a project.
Due to an inability to deliver the flats on time, the assessee refunded the advances along with interest.
The AO disallowed the interest, again citing that the project income had not yet been recognized in the P&L account.

DECISION

Compensatory Nature: The interest was paid to compensate the customers for the delay/default in the ordinary course of the real estate business.
Commercial Expediency: Refund with interest was necessary to maintain business reputation and settle disputes. It is a legitimate business cost admissible in the year it is incurred.
Verdict: The disallowance was deleted. [In Favour of Assessee]

III. INTEREST TO DIRECTORS ON CURRENT ACCOUNT AT 15% HELD REASONABLE

SUITABLE TITLE

Interest on Directors’ Current Account Balances Allowed; 15% Rate Not Excessive

ISSUE

Whether interest paid to directors on their unsecured loans (maintained as current accounts) can be disallowed as excessive under Section 36(1)(iii) read with Section 40A(2).

FACTS

The assessee paid interest on unsecured loans to directors.
The accounts were current accounts with day-to-day fluctuations (money withdrawn and deposited as per need).
The AO disallowed the interest, terming it excessive.

DECISION

Nature of Facility: The Tribunal noted that interest on “Current Accounts” (which offer flexibility to withdraw funds) is typically higher than fixed-term loans.
Market Rate: The assessee proved that it paid interest to other unrelated parties at 15%. Therefore, paying a similar rate to directors is not unreasonable or excessive.
Verdict: The interest deduction was allowed. [In Favour of Assessee]

IV. ADDITION TO CLOSING STOCK DELETED DUE TO AO’S INCORRECT AREA CALCULATION

SUITABLE TITLE

Addition for Undervaluation of Stock Deleted; Cost Per Sq. Ft. Must Be Based on Total Project Area

ISSUE

Whether an addition of Rs. 82.62 Lakhs to the value of closing stock is sustainable when the AO used an incorrect total project area figure to calculate the cost per square foot.

FACTS

The Error: The AO recomputed the closing stock value by adopting a project area of 1,04,657 sq. ft.
The Fact: The actual total project area was 1,11,717 sq. ft.
Result: By using a smaller denominator (area), the AO artificially inflated the cost per sq. ft., leading to an alleged undervaluation of stock by the assessee.

DECISION

Factual Correction: The Tribunal found the assessee’s computation was based on the correct total area. The AO’s calculation was factually erroneous.
Verdict: The addition was deleted. [In Favour of Assessee]

V. SECTION 43B DOES NOT APPLY TO AMOUNTS NOT CLAIMED IN P&L

SUITABLE TITLE

No Disallowance u/s 43B for Unpaid Service Tax if Not Debited to P&L

ISSUE

Whether the AO can invoke Section 43B to disallow outstanding Service Tax and Professional Tax which were shown as liabilities in the Balance Sheet but not debited (not claimed as an expense) in the Profit & Loss Account.

DECISION

Scope of Section 43B: Section 43B restricts the deduction of statutory dues to the year of actual payment. However, this restriction applies only if the assessee has claimed a deduction for those amounts in the first place.
Not Claimed = No Disallowance: Since the assessee never debited these amounts to the P&L (and likely did not route the Service Tax through the P&L at all, keeping it as a Balance Sheet item), the question of disallowing them does not arise.
Verdict: Disallowance deleted. [In Favour of Assessee]

KEY TAKEAWAYS

Trade Advances vs. Capital Loss: If you pay an advance for goods (cement, steel) and lose it, it is a Business Loss (Revenue). If you pay an advance for a machine or land and lose it, it is a Capital Loss.
Section 43B Defense: A common mistake by AOs is disallowing GST/Service Tax payable u/s 43B even when the assessee follows the “Exclusive Method” (where tax is not an expense but a liability). Always argue: “I didn’t claim it, so you can’t disallow it.”
Project Completion Method: While revenue is deferred in this method, purely financial costs (like interest on refund) or extraordinary trading losses (like forfeited advances) can often be claimed in the year they occur, rather than capitalized to WIP.

IN THE ITAT KOLKATA BENCH ‘B’

Bengal Omnitech Nirman Ltd.

ACIT/ ITO^*

PRADIP KUMAR CHOUBEY, Judicial Member
and Rajesh Kumar, Accountant Member

ITAppeal No.1551 (KOL) of 2024
[Assessment year 2018-19]

DECEMBER 2, 2025

Sunil Surana and S.M. Surana, ARs for the Appellant. Pankaj Pandey, DR for the Respondent.

ORDER

Rajesh Kumar, Accountant Member.- This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 21.05.2024 for the AY 2018-19.

2. The issue raised in ground no.1 is against the confirmation of addition of Rs.1,50,00,000/- by the ld. CIT (A) as made by the ld. AO by disallowing the business loss claimed by the assessee.

2.1. The facts in brief are that during the course of assessment proceedings, the Id. AO observed from the Profit and Loss account that the assessee has charged off bad debts of Rs.1,50,00,000/- and accordingly, the assessee was required to submit the details thereof. The assessee submitted that the bad debts pertained to new look Intex P. Ltd. to whom the assessee advanced Rs.1,50,00,000/- for supply of ready-mix concrete material at the project site and also furnished a copy of agreement dated 01.11.2011, besides copies of letters issued to the said party by the assessee. The ld. AO noted from the said agreement that New Look Intex P. Ltd. was to supply ready-mix concrete material to the commercial project named Omni Lake View Project Kolkata. According to the ld. AO the assessee has not recognized the revenue from the said project and therefore,the assessee was not entitled to the claim of deduction. The assessee showed the expenditure under the head working in progress incurred relating to the said project. According to the ld. AO the assessee cannot claim the expenditure in this year. The ld. AO also held that the said amount is capital loss and therefore, not eligible for deduction as bad debts u/s 36(1)(vii) of the Act. Accordingly, the same was added in the income of the assessee by disallowing the said amount.

2.2. In the appellate proceedings, the ld. CIT (A) affirmed the order of the ld. AO by dismissing the appeal of the assessee on this issue by observing that the amount was given for Omni Lake View Kolkata from which no revenue was recognized as the expenses incurred were shown under the head work-in-progress and secondly Rs.1,50,00,000/- was capital loss and not offered to tax or included in the total income for any preceding years and therefore, not eligible as bad debts u/s 36(1)(vii) of the Act.

2.3. After hearing the rival contentions and perusing the materials available on record, we find that the assessee is in the business of development of commercial and residential properties. We note that the assessee has paid Rs.1,50,00,000/- as advance to New Look Intex P. Ltd. for supply of Ready-mix concrete material for the project Omni Lake View Kolkata. However, the same was not supplied by the party and the advance given was also not refunded to the assessee. Thus, the advance given became bad. The assessee treated the said loss as revenue in nature by charging the same to the profit and loss account which was not allowed by the ld. AO on the ground that the revenue was not recognized during the year from the said project whereas as matter of fact we observed that the assessee has already booked the commercial spaces and amount received from the customers were shown against sale of commercial spaces in the balance sheet as liability. We also note that the assessee has shown income from the said project in the subsequent years as the assessee following project competition method. Under the said method,expenses are accumulated under the work-In-Progress and the corresponding advances received from the customers are also shown as liability and only when the project is completed, the expenses are shown against the revenue receipt from the said project which may be in the earlier or subsequent year. Accordingly, we are not in agreement with the conclusion drawn by the ld. CIT (A) on this issue. The case of the assessee is squarely covered by the decision of Hon’ble Delhi High Court in case of CIT v. Sumangal Overseas Ltd. [IT Appeal No.174 of 2011, dated 18-11-2011] in which the Hon’ble High Court has held as under:-

“A trading loss has a wider connotation than a bad debt. A bad debt may also be a trading loss. But a trading loss need not necessarily be a bad debt. There, may be a bad debt which may not fall within the purview of section 36(1)(vii) of the Act, by may well be regarded as one eligible for deduction incurred in the course of carrying on business will come under that category and will naturally enter into computing the net total income as the real profit chargeable to tax cannot be arrived at without setting off legitimate trading loss. “

Hence the assessee pleas for your relief in the above matter.”

2.4. Therefore, in our considered view the advance givne is in the ordinary course of business is a trading loss even if the income from the corresponding income for project for which it was given has not been recognized in the profit and loss account. Consequently, we are inclined to set aside the order of ld. CIT (A) on this issue and direct the ld. AO to allow the amount as business loss. The ground no. 1 is allowed.

3. The issue raised in ground no.2 is against the confirmation of disallowances of interest Rs.3,13,530/- and Rs.6,36,432/- paid on refund of advances to the customers on cancellation and agreements for sale.

3.1. The facts in brief are that the ld. AO in the assessment proceedings observed that assessee has paid interest on unsecured loans during the year which included ?6,36,432/- paid to Smt. Meena Bajpai & Ashutosh Kumar on the outstanding loans. Accordingly, the assessee was called upon to clarify the same. The assessee submitted that the parties had given booking advance for flat no.6A in Omni Lake View Project, which could not delivered in time and hence, the amount was refunded along with interest of Rs.6,36,432/-. The assessee furnished before the ld. AO the booking form as well as the receipt issued to the said party. The ld. AO disallowed the interest paid to Smt. Meena Bajpai & Ashutosh Kumar on the ground that the income was not booked from Omni Lake View Project Kolkata and therefore, the said interest paid should be added to the work-in-progress. The ld. AO in Para no.7.3 noted that the assessee had apportioned total interest expenditure of Rs.2,00,59,506/- on all projects on the basis of average capital employed and since, the interest of Rs.6,36,432/- exclusively pertains to Omni Lake View Project, the sum apportioned to the Project Omni Tulasi & Keyatala Project for which the revenue was recognized,during the year the amounting to Rs.3,13,530/- was disallowed and added to the income of the assessee.

3.2. In the appellate proceedings, the ld. CIT (A) confirmed the addition.

3.3. After hearing the rival contentions and perusing the materials available on record, we find that the interest was paid to the purchasers of the property on the money received as booking advance in respect of flat no.6A, which could not be delivered in time and therefore, the interest was paid to the said party of Rs.6,36,432/-. The AO did not allow the same on the ground that the income of the same project was not recognized in the profit and loss account. The Id. AO disallowed the interest to the tune of Rs.3,13,530/- on the ground that the assessee apportioned the interest expenditure of Rs.2,00,59,506/-on all the projects on the basis of average capital employed. The ld. AO disallowed the said amount on the ground that interest amount of Rs.6,36,432/- exclusively pertained to Omni Lake View Project, Kolkata. The ld. AO disallowed this on the ground that the amount of Rs.6,36,432/- should be added to Omni Lake View Project, Kolkata and cannot be apportioned on all the purchases. However the AO disallowed Rs. 3,13,530/- only. Apparently, the interest was paid to the purchaser of the flat when the amount received as booking advance was refunded to the purchaser along with interest upon assessee failing to deliver the flat as promised. Therefore, the same is admissible as business expenses and has to be allowed. The ground no. is allowed.

4. The issue raised in ground no.3 is against the order of ld. CIT (A) confirming the addition of ?14,55,630/- in respect of interest on unsecured loans which are carrying over from the earlier years on the ground that the interest paid is excessive and unreasonable.

4.1. The facts in brief are that the ld. AO found during the course of assessment proceedings that the assessee has paid interest at the rate of 18% to the directors of the assessee company. The details thereto is given in para no.8.1 of the assessment order and interest was received only 9% on the loans to another company. Therefore, the assessee was asked to justify the same. The assessee submitted that interest received from the group company is lower, as the said company paid interest at the rate of 9% to several parties. The ld. AO rejected the contention of the assessee and brought differential amount to tax by disallowing the same.

4.2. In the appellate proceedings, the ld. CIT (A) confirmed the order of the ld. AO.

4.3. After hearing the rival contentions and perusing the materials available on record, we find that the assessee has current account with the directors of the assessee company on day-to-day transactions basis meaning thereby that the loans were taken and repaid as and when the funds are available. Sometime, the period ranges from one day to few days. Therefore, we find merit in the contention of the assessee that in case of current account the interest is normally higher than the interest paid on the fixed amount of loan. We note that interest paid to other parties by the assessee was at the rate of 15% and the copies of account of the parties as well as confirmation letters are available in the paper book. Therefore, we find merit in the contentions of the assessee especially on the ground that in the earlier years similar interest has been allowed to the assessee. Accordingly, we set aside the order of the ld. CIT (A) and direct the ld. AO to delete the addition.

5. The issue raised in ground no.4 is against the confirmation of addition of ?82,62,931/- in the closing stock by the ld. CIT (A) as made by the ld. AO on account of stock difference.

6. During the course of assessment proceedings, the ld. AO observed that assessee has shown closing stock of finished goods of Project Omni Tulasi at Rs.11,66,17,174/-.The AO noted from the working of the closing stock filed by the assessee that the assessee has computed the closing stock by taking into account the total area at 104374 sq. ft, whereas area stated by the assessee himself was 111717 Sq. ft. Consequently, the difference in closing stock was worked out at Rs.82,62,931/- and added to the income of the assessee which was confirmed by the ld. CIT (A).

6.1. After hearing the rival contentions and perusing the materials available on record, we find that the ld. AO computed the stock difference by taking into the area of 1,04,657 sq. ft and calculating the total cost of the project at Rs.23,43,85,640/- by the same area which calculated the cost per sq. ft. at 2,239.56, whereas according to the assessee the cost per sq. ft should be computed on the basis of total area of the project i.e. 1,11,717/- Sq. Ft. The computation of details furnished by the assessee are as under:-

Total cost of project Omni Tulasi	Rs. 23,43,85,640
Total area of project Omni Tulasi	111717 sft

Less: Land Owner Share area	7060 sft
Assessee’s Share	104657 sft
Area Sold	48896 sft
Closing stock of area/ unsold area	55761 sft
Cost of per sft (234385640/ 111717)	Rs. 2,098.03
Value of closing stock (55761 *2098.03)	Rs.11,69,88,251/-

6.2. This is clear from the above that there is no under valuation stock(very negligible difference) by the assessee as the ld. AO has calculated the stock by taking our wrong figures of area which has resulted into this mistake. Accordingly, the order of ld. CIT (A) is set aside and AO is directed to delete the addition. Before parting, we would like to mention that these is a Revenue neutral addition as the closing stock of one year becomes the opening stock of the next year as has been in the case of V.K.J Builders and Contractors Pvt. ltd. v. CIT (SC)/[2009] 318 ITR 204 (SC) (SC)/[2009] 318 ITR 204 (SC). Further, when there is no revenue effect the mater and the addition is revenue neutral, no addition should be made and should not be disputed by revenue as has been held in the case of CIT v. Excel Industries Ltd. ITR 295 (SC)[08-10-2013].

6.3. Considering the above facts and circumstances and also the relying on the decisions of Hon’ble Supreme Court, the appeal of the assessee is allowed.

7. The issue raised in ground no.5 is against the confirmation of addition of Rs.2,57,290/- as made by the Id. AO on account of service tax and Rs.1,560 /- on account of professional tax, which was outstanding when the same was not disallowable as per the Provisions of the Act as not debited into the profit and loss account

7.1. After hearing the rival contentions and perusing the materials available on record, we find that so far as the disallowances of serve tax is concerned, undisputedly the same was shown as liability in the balance sheet and no deduction was ever claimed in the profit and loss account. The same is position with regard to the other disallowance. Therefore, the same is beyond the ambit of Provisions of Section 43B of the Act. The issue is squarely covered by the following decisions:-

Hubli

Electricity Supply v. DCIT [ITAppeal No. 341(Bang) of 2023, dated 1-12-2023]

Wadhwa Residency (P) Ltd. v. ACIT (Mumbai);

DCIT

v. M.C. Retail (P.) Ltd. [ITAppeal No. 419(Mum) of 2017, dated 28-9-2018], ITAT Mumbai Bench:

Envision Enterprise Solutions (P.) Ltd. v. ITO [ITAppeal No. 315(Hyd) of 2016, dated 12-8-2016] ITAT Hyderabad Bench;

7.2. Consequently, we set aside the order of the ld. CIT (A) and direct the ld. AO to delete the addition. The ground no. 5 is allowed.

8. In the result, the appeal of the assessee is allowed.